Yves here. I wish this post was written in a more foursquare manner, because I take away two points from it that I wish had been stated more clearly. The first is the well-knnown fact that a lot of corporate subsidies that are meant to induce businesses to Do Something wind up paying them for things they were going to do anyhow. Second is that in the case of “employment” subsidies, the money too often did not lead to new hiring, but instead helped supplement the incomes of low-wage workers. That enables employers like WalMart and McDonald (and increasingly colleges and universities) to pay well under a living wage because they know that the public purse will help shore up these sub-standard incomes.
By Erinç Yeldan, Dean of the faculty of Economics and Administrative Sciences at Yasar University and an executive director of the International Development Economics Associates (IDEAs), New Delhi. Originally published at Triple Crisis
Global finance centers have been holding their breath for almost a year by now: will the U.S. Federal Reserve (the “Fed”) finally start “tapering” off from its monetary expansion programs, known as quantitative easing (QE)? By way of three QE operations, the Fed had amassed a total of $3 trillion worth of assets from the financial markets over a course of less than four years. This was equal to roughly 20% of U.S. GDP. In turn, interest rates fell all around the globe to virtually zero. While short-term low-risk interest rates in the United States fell to zero, interest rates in some countries remained much higher, so large interest rate spreads emerged between the United States and other countries. Notable “carry trade” emerged, for this reason, between the U.S. and Brazil; and yet, unemployment only slowly fell back to the pre-recession period, despite the fact that the labor force participation rate declined sharply to its 1970s level.
Now, seeing the expansion of the monetary base barely made a dent in stimulating real productive activity (see my January 2015 Triple Crisis blog post), the Fed declared in early Spring that “from now on it will be patiently waiting to start raising its policy interest rate and quitting QE operations.” This means bad news for global finance capital, which was drugged with the inflow of cheap liquidity, with zero credit costs.
Now that the financial smoke is clearing, we are in a better position to see the real costs of public programs aimed of stimulating employment and real activity.
As a response to rising global unemployment during the Great Recession, many countries introduced direct and indirect incentive packages to cover labor costs. These often took the form of reducing and covering the employer share of social security taxes, tax breaks, publicly financed reduced-hours programs, and other public support programs. The costs of these employment subsidies were measured in multi billions dollars, and yet their beneficiaries had been mostly big corporations such as McDonalds and Walmart, which already profited handsomely from low wages. In return, employment gains had been meager at best, while the subsidy costs were borne by the public sector.
The needy are not necessarily unemployed, or marginally employed in the informal sector. Ken Jacobs, chair of the U.C. Berkeley Center for Labor Research and Education, reports, for instance, that over the course of the Great Recession, public support for working families accounted for 52% of state spending on health and cash assistance. Accordingly, public support programs to compensate for the low wages of workers in the formal corporate sector cost as much as $153 billion a year to American taxpayers. Among the needy are those employed in home care and service sectors, where 48% of all workers rely on public assistance—food stamps, Medicaid, and other forms of support. Jacobs reports that this extends even to some of the most educated people in the United States: a quarter of part-time faculty at colleges and universities are in need of public support.
Similar employment-subsidy programs were enacted in all over the globe. Turkey, situated at the periphery of the global value chains, introduced a complex web of employment subsidies at a cost of US$7.5 billions a year, or about 1% of its GDP. Data reveal that while these programs sponged as much as 3% of total fiscal expenditures, with a meager return of only 0.1% of additional employment. The real gainers were large enterprises in the formal sector. Low wages were sustained by public support programs, as real costs were taken over by the public sector.
The U.C. Berkeley Report further corroborates the now well-known finding that from 2003-2013, inflation-adjusted wages fell for the entire bottom 70% of the U.S. workforce. As the global crisis lingers on and has given way to a period of stagnation, and the Fed is preparing for “victory” over its QE operations, it is becoming more and more clear for the working class that the gradual growth in employment does not necessarily mean growth in wages.
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On employment subsidies and public assistance merely enabling employers to pay poverty wages, Frances Coppola wrote I think the best single piece on the problem here.
(PS. Fairly off-topic, but, on the socio-political, “Kaleckian” function of McJobs, see John Ruccio on “the reserve army of the underemployed”)
Thank for the Coppola link. I’m a big fan of her blog but I missed this Forbes piece.
Any idea why she left Peria ?
This is a great read. I loved this line:
This seems to be the more nuanced challenge we have before us, particularly but not exclusively in the American context. Not how to increase the quantity of jobs in the formal economy so much as how to increase the quality of them.
The quality of jobs is not independent of the quality of the people doing them, it is a dialectic. But the well paid happy productive adult is an achievable situation, for some of us. But short of deliberate dismantling of the “race to the bottom” that is part of the Anglo-American imperialism, how can that be expanded to more people? That or the Five Eyes can choose a different policy, that is economically nationalist in a neocon fashion, rather than economically international in a neolib fashion. I think the Franco-Russian POV would be to dismantle both GB and US/Canada in favor of the situation over 250 years ago, before the French & Indian War. But exchanging one group of Western hegemons for a different Western group, seems a waste.
What we are experiencing is a creeping return of Aristocracy.
We know how to manage this.
1. Death Duties to break up the estates
2. Progressive Taxation
3. Strong Unions
What we have now id weak estate taxation, not very progressive taxes, and weak unions. I’d suggest that the lack of strong unions is the root cause, because there is little worker solidarity.
Unions need to form to organize within geographic areas, across many industries, as well as within industries.
Unions are no panacea. They are less worse than employment only, and come with behavior, or enforcement, of solidarity. No one wants to join a union, they have to join as a self-preservation mechanism against the depredations of management.
So basically Synoia you want to leech off the wealth earned by others, right?
“Progressive Taxation“?!?!
The US has one of the most progressive tax systems of any industrialized country…
A person making $250,000/year should not pay one more penny in taxes than someone making $2,500/year…
BTW as a one time union member for 35+ years can say that without a doubt the unions in the US are long on making promises, short on delivering on them but still grasping continuously for the wallets of their membership…
I think the issue here is not so much our tax rates but we get for them. I have friends in the UK and France whoosh 50-60 percent in taxes. You might gasp at that but when you look at the rates U.S. Citizens pay between federal, state, and local taxes, we are not far off. The difference is guaranteed healthcare (albeit imperfect but still guarantee) and a solid social pension program. Our system is full of so many loopholes that the progressive taxation stops at 500k and beyond that is determined by how good your lawyer and CPA are(see mitt Rodney’s reluctance to release his tax returns)
So, if our progressive system were more rigid and ultimately more fair! We’d be in better shape. Ala, this is not the case.
The capitalist leech off surplus value that others create that’s the essence of the system.
That’s an interesting moral position. I would say quite the opposite. Higher incomes should pay more in taxes than lower incomes.
Head fake, Fed will definitely do QE 4, people are yelling “fire” in the crowded theatres of capital around the globe, equities, forex, commodities, fixed income. Kuroda is already on QE 23 and the yen and wages are getting clobbered, the Red Communists in China thought they were Red Capitalists, surprise! Even if you outlaw selling and force broker/dealers to commit tens of billions into roach motel markets they can still drop like a rock, emerging markets are a bloodbath. We’ll hear the same BS from the Marriner Eccles building and Versailles-on-the-Potomac, “it’s crucial we do not let the banking system fail” (Ka-ching). Corporate “incentives” to hire are meaningless as the article points out, subsidies INEVITABLY simply distort markets and money is no exception. Solve the root problem and we would have a chance to get our lives back but the Pathological Priests of Free Money Forever cannot be stopped. As a commentator in the Financial Times said “thank you for the explanation of QE, I now know what it is. My problem is I no longer understand what money is”. Until our Dear Leaders get a clue what money is we will be stuck on the the downward slope of less and less for more and more people…does the flock of sheep wake up and realize there are lots of them and only one or two wolves? Alas, I doubt it.
The markets are so not free that we could get multiple rate increases each supported by a bout of QE.
We’ve reached the point where any kind of intervention is possible until the real economy collapses under the weight of inefficiencies.
The soviet union lasted decades despite gross mismanagement..
Anyone who thinks they can predict the next decade is deluded.
. . . The costs of these employment subsidies were measured in multi billions dollars, and yet their beneficiaries had been mostly big corporations such as McDonalds and Walmart, which already profited handsomely from low wages. In return, employment gains had been meager at best, while the subsidy costs were borne by the public sector.
No. They are borne by other private sector for profit businesses. The public sector are the asshats that rob from one group to give to another and make it possible for this corruption to bloom.
The Fed subsidizes Amazon with QE. Or isn’t that obvious?
The UC study employs this definition:
“We define working families as those that have at least one family member who works 27 or more weeks per year and 10 or more hours per week.”
I’m going to guess that made it WAY easier to get the results they were looking for.
You’re slyly implying that it is hard to figure out that millions upon millions of workers don’t earn decent wages? Only manipulated, dishonest data could produce such a conclusion?
I’ll just do my perfunctory ‘taxes don’t pay for anything’ and mosey on. Before I do though, I’d like to throw in a plug for some more efficient ways of dealing with the issue of 59.3% employed to population ratio. It is at the same level as April 1984. I fail to see how that can be a good thing. The bottom 40% or so of the population would be better served, and the rest of the private sector as well, with a Job Guarantee. By employing people who are at the low end of the economic line and finding them a paying job at say 23k/yr, the counter cyclical effect would eventually build up to an increase in the private sector stock flows. Debt in that sector would go down. Throw in paid college tuition and the public option for Medicare. Additionally commodity subsidies should be dropped (phased out over several years) on all agricultural and energy commodities. That way food prices would decline to a much lower level. On the back side, farmers could be paid a fixed wage based on the amount of product they produce up to some fair maximum.
Innovative planning and thinking will have to be the way of the future or we are in dire straights. As in banana republic.